Last Updated: 1:10am BST 03/07/2008
Wealthyexpats relying on offshore pensions to fund a sunshine lifestyle face aswingeing bill from the UK taxman, writes Paul Burgin
The Revenue iscracking down onflexible expat pensionscheme allowancesintroduced just twoyears ago.
Those moving theirpensions to Singapore toavoid inheritance tax andbuying annuities could face a55 per cent tax bill from theBritish government – and itcould spread to other expatdestinations.
Find out more about pensionsTake your pension abroad with youOffshore pensions, knownas Qualifying RecognisedOverseas Pension Schemes(QROPS), have generatedmuch interest from Britonsplanning a new life abroadsince they were introduced inApril 2006.
Offshore financial advisershave promoted the schemesas a way round Britishretirees being forced to take alump sum payment and anannuity by the age of 75,while still retaining tax reliefgranted on contributionsmade in the UK.
The number of transfers topopular destinations hasgrown steadily in recentyears. Jurisdictions such asSingapore, Hong Kong, Irish Republic and theChannel Islands all offermore lenient tax treatment onretirement income options,inheritance and lump sumpayments from pensionfunds.
But difficulties indetermining how welloverseas schemes are runand whether they genuinelywill be used to providepensions in retirement mayhave led to a crackdown byUK authorities.
In a little-publicised move,all Singapore pensions weresuddenly removed from theUK taxman's list of qualifyingrecognised overseas schemeson May 27. The pension fundindustry believes othercountries could follow.
Under QROPS rules, thoseleaving the UK on apermanent basis can transfertheir pensions to an overseasscheme and retain their UKtax benefits after a holdingperiod of just five years,providing the new schemecan demonstrate that at least70 per cent of the fund will beused to provide a pension inretirement.
For those funds outsidethese rules, transfers to nonqualifyingschemes couldresult in a tax penalty ofbetween 40 per cent to amaximum 55 per cent beingissued by HM Revenue &Customs against the pensionholder, to claw back tax reliefgranted in the UK.
As Singapore does not levyinheritance tax on remainingpension pots upon death andsome pensioners may avoidlocal income tax altogether, ithas been heavily marketed byoffshore advisers.
With the country now offthe qualified recognisedscheme list, those who have already transferred there willhave to wait until HMRCissues more guidance on howthe delisting of Singaporefunds will affect themdirectly.
While HMRC refuses todisclose why individual fundshave been dropped, thedecision has surprised thepension industry. Manybelieve that persistentrumours of mis-selling in theFar East could be the cause.
Fund providers and UKindependent financialadvisers say investors arebeing targeted with "pensionbusting"promises, allowingthem to take their fundspartly or wholly in cash wellahead of retirement.
"With little or no regulationof advisers in manyworldwide locations, they areclearly open to abuse, firstfrom the product providersand second from the productdistributors," says SamInstone, an adviser withLondon-based AESInternational.
Differing charges, accessand contract terms requirecareful examination andmake comparison difficultwithout qualified advice, headds.
As no QROPS fund has yetto reach the five-year holdinglimit, the Government's rulesand procedures on how fundsare run until retirement haveyet to be tested.
One of thebiggest schemes affected bythe move is the PantheraROSIIP fund, an early entrantto the offshore pensionmarket. It has lodged anappeal against the decision,believing that HMRC hasmisunderstood localSingapore legislation.
"There is a lot of rumourand gossip in the marketplaceand the Revenue has an issuewith how pension funds areregulated in Singapore," saysBethell Codrington,managing director forPanthera.
He adds that his schemeoriginally chose to registerthere because the regulator,the Monetary Authority ofSingapore, is regarded as oneof the strictest in the world.
Above local legalrequirements, the Pantherafund also takes additionalsteps to maintain its QROPSstatus. It uses UK-recognisedcalculations for retirementincome payments and avoidsinvestment in taxableproperty, such as buy to let,which HMRC regards asunsuitable for pension funds.
As part of its appeal, thefund is seeking confirmationthat those already in thescheme will be protectedunder the QROPS rules.
Should the appeal fail, it isalready applying foradditional registrations inMalaysia and Hong Kong tooffer investors continuedprotection.Until a decision is reached,Panthera says those planningto move their pension abroadshould delay their decision,as other countries may wellbe affected by closer scrutinyby the taxman.
One offshore adviserpromoting QROPS hasalready quit Singapore.Inter-AllianceInternational, owned byoffshore adviser deVere andPartners, shut down itsoperation in February afterreceiving a S$56,250 (£21,000)fine for allowing eight of itsrepresentatives to advisewithout valid licences.
The advisers and Inter-Alliance International's chiefexecutive officer are believedto have left the island.
Advisers in the UK remainwary of recommending theremaining recognised QROPSschemes, even those fromjurisdictions closer to home.
Last month, the Isle of Manintroduced new pension rulesthat make QROPS transfersextremely attractive. Lumpsum payments of 30 per centon retirement compare wellto the mainland's 25 per centlimit.Investments are moreflexible too, with residentialproperty allowed.
The bigbenefit is that no compulsoryannuity is required, aperennial bugbear for Britishpension fund-holders. Morethan 70 Manx schemes havealready been grantedqualified recognised status.Malcolm Cuthbert, of UKadviser Killik & Co, says eventhose wanting to use suchschemes for legitimatereasons are now at risk.
"Thousands of people arealready in these schemes. Weare getting a huge interest,not surprising given the340,000 or so people whoemigrate every year, but weremain suspect of pensions-busting,"he says.
He worries, too, that HMRCrules are ill-defined andregulation may well changeagain in future, affecting yetmore investors and morejurisdictions.
"The legislation is not setin stone and it makes menervous that the situationmay well change again. We donot know what could happento those who have usedQROPS for all the rightreasons," he warns.
